I was excited this week to attend the American Seniors Housing Association (ASHA) Mid-Year Meeting — my first in-person conference since the Covid-19 pandemic reached U.S. shores.
After two jam-packed days of conversations with industry leaders, it’s no surprise that workforce challenges were a consistent theme.
More surprising to me, several conversations turned to ideas related to increasing employee ownership or profit-sharing. Two of those conversations were with some of the most esteemed people at the ASHA event: new Hall of Fame inductees Bill and Bob Thomas and Patricia Will.
These conversations about workforce have left me with a lot of questions but also some initial observations and ideas, including:
- The labor crisis may moderate in the near-term, but some providers may not be able to survive that long
- Employee ownership structures such as co-ops and employee-owned stock plans (ESOPs) are on the rise in other industries, and could become more common in senior living
- Senior living providers should think expansively about employee ownership, and how to communicate with workers about opportunities to create personal wealth beyond wage increases
Workforce challenges deepen financial instability
Throughout 2021, I’ve heard a number of notable success stories from providers that have been able to recover occupancy and drive NOI, and that continued at ASHA. Chicago Pacific Founders’ Grace Management platform of senior living communities should reach 92% occupancy as of Aug. 1, CPF Co-Founder and Operating Partner John Rijos said. And Koelsch Communities has now surpassed its pre-Covid occupancy levels, COO Eva Arant told me.
But, I also heard from the leader of a mid-size operator who said that the company is in bad — and worsening — financial straits. Their REIT partner has been pulling from their security deposit for several months as they have not been paying rent, and the future remains tenuous, largely because of the labor crisis. With revenues still down, the operator has had to pay $20/hour wages in certain markets.
This operator executive is in routine contact with leaders of other provider organizations, and said that the situation is common among them.
It’s a message that ASHA and other industry associations such as Argentum have been blaring in recent days, making the case that the much-delayed Phase 4 allocation from the Provider Relief Fund is desperately needed and that this money should not be diverted to help fund an infrastructure package.
“We’ve been waiting for the promised Phase 4 allocations for months, and some providers are still awaiting funds from earlier phases,” Argentum CEO James Balda stated. “This effort to rob seniors to pay for sewer pipes is incredibly irresponsible; senior care communities nationwide will be facing imminent financial ruin just as the Delta variant of COVID heightens the need for housing that can better protect older Americans.”
In the short term, federal financial relief and the expiration of enhanced unemployment benefits could take the labor crisis from extreme to “just” very bad. But providers that are in quickly deepening distress might not be able to make it that long, particularly if delta puts a further damper on occupancy growth and strains the labor pool even more.
Capital providers that have been patient will not remain so forever, and a “concerning” amount of supply could enter the M&A market between Q4 2021 and Q2 2022, Tim Cobb, Senior Housing & Healthcare – Investment Sales Lead at Berkadia, told me.
“The banks are not going to hold on forever, and we have a lot of forbearance agreements out there right now,” he said. “And it’s probably the end of this year, banks are going to start losing tolerance.”
Employee ownership and profit sharing
While the situation for some providers is grim, the present workforce crisis also is prompting some interesting discussions about longer-term changes related to the industry’s labor models.
One idea that I found especially interesting came from Rick Shamberg, managing director of investment fund Scarp Ridge Capital, who argued that now is a moment for ownership groups to accept that management companies need greater financial rewards for strong performance — and that employees also need and deserve to directly benefit from that performance.
Those rewards could come in the form of more direct profit-sharing arrangements or even employee ownership structures such as co-ops or employee stock ownership plans (ESOPs).
The impediments to such structures are significant. One provider executive I spoke with warned that converting to an ESOP can lead to a company becoming overleveraged, as debt is taken on to buy out existing owners.
Indeed, creating an employee-owned company or converting to employee ownership might be an extreme step, but co-ops and ESOPs are on the rise in other industries, including restaurants and home care, and their formation could accelerate if the Biden administration succeeds in raising capital gains taxes. If employee ownership gains traction in these industries that compete with senior living for workers, providers would be well-advised to keep tabs on the trend.
Employee-owned businesses also could gain luster coming out of Covid-19 because they were three to four times more likely to retain non-manager and manager employees, 3.2 times more likely to retain staff, and “significantly less likely” to reduce hours or pay than nonemployee-owned companies during the pandemic, according to Rutgers University’s School of Management and Labor Relations and the Employee Ownership Foundation.
The New York Times cited that Rutgers data in a 2020 article about the appeal of ESOP conversion to local, family-owned businesses. By all accounts, the pandemic has led many smaller, family-owned senior living providers to consider transition plans; many will no doubt be sold or close, but I would not be surprised if a portion of them went to employee ownership, in an effort to keep the businesses intact and locally controlled. While not common, senior living providers such as EmpRes Healthcare Management and Miller’s Health Systems are structured as ESOPs.
Less extreme than converting to an ESOP or co-op, I think larger operators would be wise to consider how they can provide workers with a greater sense of ownership — one possibility is giving executive directors and other leaders opportunities to share in profits or take an equity stake, and educating all workers about this route toward career advancement and wealth creation.
Some version of this idea was put forward both by the Thomas brothers and Patricia Will in my interviews with them at ASHA.
The Thomases have no imminent plans to retire from Senior Star, the company they founded and still help lead as principals. But, as part of their eventual “exit strategy,” they intend to create incentive plans for executive directors and middle managers to be able to take equity in the company. The idea is that the Senior Star platform will be appealing to outside investment groups in the coming years as the Covid recovery takes hold and the boomer demand wave gains strength, and the brothers want key employees to be able to realize upside through any future relationships with private equity or other capital partners that “merge interests” with the company.
“These associates, these leaders here are going to have this great opportunity, frankly, to do what we’ve done, and we’re going to help them to do that,” Bill Thomas said.
These discussions with Shamberg and the Thomases prompted me to ask Belmont Village Co-Founder and CEO Patricia Will whether she has ever considered employee ownership. While she has not considered out-and-out employee ownership, team members have been sharing in company gains “pretty far down in the organization” throughout the business’s history.
“In order to get the best from the best, and keep them, you have to be willing to share,” she said.
Depending on an employee’s role, they can receive a profits interest or become a direct investor in a community.
“I think that we now have people with us who are invested through a profits interest that now have enough money to invest on their own, and for me, that’s tremendously gratifying to see,” Will said.
When I asked whether this was a common practice throughout the industry, Will said she does not believe so.
When I asked whether it should be more common, she said it is up to individual companies, but her own opinion is clear: “I think it’s an important tool to incent and retain talent.”